Hedge fund group warns BoE gilt repo reforms could hurt liquidity - report

The Alternative Investment Management Association (AIMA) has expressed concerns to the Bank of England regarding proposed reforms to the UK gilt repo market, warning that these changes could increase market volatility and reduce liquidity during periods of stress. The AIMA, which represents hedge fund managers, has highlighted the potential for new vulnerabilities and greater exposure to market disruptions in the event of expanding central clearing in the gilt repo market.

The warning comes amid a global bond selloff, which has caused borrowing costs to rise, with 30-year UK gilt yields hitting their highest level since 1998. Regulators are also closely monitoring the growing influence of hedge funds in sovereign bond markets, as the International Monetary Fund (IMF) reported an increase in hedge fund participation in the market.

The Bank of England (BoE) is currently consulting on measures to strengthen the gilt repo market, including expanding central clearing and implementing minimum haircuts on non-centrally cleared transactions. These reforms aim to provide greater protection to lenders and mitigate the risk of forced asset sales during market stress.

The AIMA has cautioned that the reforms could lead to increased reliance on daily repo financing by hedge funds, potentially exposing investors to heightened funding market disruptions. The BoE has stated that any reforms would likely take years to implement rather than months.

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